The Bank of North Dakota is the only state-owned bank in America.
Despite that, or because of it, the bank earned a record profit last
year even as its private-sector corollaries lost billions.

Some who have difficulty even absorbing news of a profitable
socialist enterprise point to North Dakota's well-insulated economy,
which is heavy on agricultural staples and light on housing speculation,
as the source of its success.

But this has not stopped out-of-state politicos from making
pilgrimages to Bismarck for counsel and advice. Could opening
state-owned banks across America get us out of the financial crisis? The
Bank of North Dakota, with its $4 billion under management, has avoided
the credit freeze and crisis by creating its own credit, and in doing
so, is leading the nation in establishing state economic sovereignty as
well. Could decentralizing large sectors of finance provide better
insurance - a better hedge, if one may use that term - for the people,
against the "too big to fail" phenomenon?

The North Dakota state bank was created 90 years ago, in 1919, as a
populist movement swept the northern plains. Basically it was a very
angry movement led by farmers against bank and land speculators in
Minneapolis, or New York. Those money markets decided who got credit and
who did not and who got to market their goods. So a rebellion swept the
northern plains. In North Dakota the movement was called the
Nonpartisan League, and the League actually took control of the
legislature and created what was called an industrial program, which
created both the Bank of North Dakota as a financing arm and a
state-owned mill and elevator to market and buy the grain from the
farmer. And both of those institutions are in existence today doing
exactly what they were created to do 90 years ago.

The funding model, or deposit model, is really the unique engine that
drives that bank. The state bank is the depository for all state tax
collections and fees. In effect, this is a captive deposit base. The
bank pays a competitive rate to the state treasurer to help insure
competent management. What separates the state bank from private
institutions is that the base of deposit funds is plowed back into North
Dakota in the form of loans to foster public state economic development
activities.

Private banks also invest their deposits. The difference is that the
state bank invests a larger portion of that money back into the state's
own economy. Investments are put into agriculture or other economic
development programs that are deemed necessary in the state. Energy
production, due to ethanol, now plays a huge role there too. The bank
does a lot of student loan financing as well. It designs specific loan
programs for different business sectors at very low interest rates to
encourage activity along certain lines.

The bank has also played a big role in recovery from disasters caused
by flooding. It walks a fine line between competing and partnering with
the private sector. Most of the lending is participatory in nature.
It's originated by a local bank wherein the state bank can come in and
participate and use some of its programs to share risk, or buy down the
interest rate. The bank also works to provide guarantees similar to the
Small Business Association (SBA) to encourage entrepreneurial startups.

Aside from that, the bank acts as a bankers' bank or a wholesale
bank, providing services to banks, whether it's check clearing,
liquidity, or bond accounting safekeeping. In this sense it acts as kind
of a "mini" Federal Reserve.

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The advantage of a publicly owned "bankers' bank" instead of a
privately owned one is this: the model employed is to use the deposit
base to help other banks with funding their loans, even providing
federal funds lines with excess liquidity - by buying and selling fed
funds and acting as a clearinghouse for check clearing activity.

North Dakota citizens are fairly conservative and the bank didn't do
any subprime lending. Nor was there a powerful incentive to get into the
derivatives markets and put on swaps and callers and caps and credit
default swaps. Their philosophy was: "If we don't understand it, we're
not going to jump into it." Thus they avoided those pitfalls.

They also provide a dividend back to the state. The Bank of North
Dakota stands to make somewhere north of $60 million this year, and will
turn over about half of the profits back to the state general fund. And
so over the last 12 years, a third of a billion dollars has been
returned to the general fund to offset taxes and to aid in funding
public sector needs.

The State of North Dakota does not have any funding issues at all. In
fact they are dealing with the largest surplus ever. North Dakota
state bank deposits are not insured by the FDIC, but by "the people of
North Dakota". Yet the bank has never been a bank that tries to hit home
runs. It has a specific mission that is more important. For most
corporations and banks, their top priority is to maximize shareholder
return. The Bank of North Dakota does have a nice return - a return on
net operating assets of 2 percent; a return on equity of 26 percent. But
the mission of making sure the needs of the state are met comes first -
being able to finance those types of investments that make the state go
forward.

When the act that established the North Dakota state bank was
enacted, all public corporations in the state were also required to
deposit their funds in the bank. However a ballot initiative the same
year eliminated that requirement, though not without a big struggle over
the issue. Though initially conceived by Nonpartisan League founders as
a credit union style institution to free the farmers from predatory
lenders, the bank's functions were partially neutered by the time of its
inception by the business-backed "Independent Voters Association." The
recall of NPL Gov. Lynn Frazier in 1921 effectively ended the initial
plan, with the bank taking a more conservative central banking role in
state finance.

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The current president and CEO is Eric Hardemeyer. The bank is managed
by the North Dakota Industrial Commission, which is composed of the
governor, attorney general, and the agriculture commissioner (formerly
the agriculture and labor commissioner) of North Dakota.

Can a "state bank" play a positive role in current struggles for jobs
and sustainable recovery? The answer must be YES - although the
emergence of such banks must be linked directly to the kinds of
investments each state needs to move forward.

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